[Senate Hearing 112-784]
[From the U.S. Government Publishing Office]
S. Hrg. 112-784
BOOSTING OPPORTUNITIES AND GROWTH
THROUGH TAX REFORM: HELPING MORE
YOUNG PEOPLE ACHIEVE THE AMERICAN DREAM
=======================================================================
HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JULY 10, 2012
__________
Printed for the use of the Committee on Finance
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COMMITTEE ON FINANCE
MAX BAUCUS, Montana, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico JON KYL, Arizona
JOHN F. KERRY, Massachusetts MIKE CRAPO, Idaho
RON WYDEN, Oregon PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan JOHN CORNYN, Texas
MARIA CANTWELL, Washington TOM COBURN, Oklahoma
BILL NELSON, Florida JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland
Russell Sullivan, Staff Director
Chris Campbell, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENT
Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman,
Committee on Finance........................................... 1
WITNESSES
Newman, Dr. Katherine S., James B. Knapp dean of the Zanvyl
Krieger School of Arts and Sciences, The Johns Hopkins
University, Baltimore, MD...................................... 3
Corak, Dr. Miles, professor, Graduate School of Public and
International Affairs, University of Ottawa, Ottawa, Ontario,
Canada......................................................... 6
Lefgren, Dr. Lars J., associate professor, Department of
Economics, Brigham Young University, Salt Lake City, UT........ 9
Currier, Erin, project manager, Economic Mobility Project, The
Pew Charitable Trusts, Washington, DC.......................... 11
Steuerle, Dr. C. Eugene, institute fellow and Richard B. Fisher
chair, The Urban Institute, Washington, DC..................... 12
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Baucus, Hon. Max:
Opening statement............................................ 1
Prepared statement........................................... 27
Corak, Dr. Miles:
Testimony.................................................... 6
Prepared statement........................................... 29
Responses to questions from committee members................ 42
Currier, Erin:
Testimony.................................................... 11
Prepared statement with attachment........................... 60
Responses to questions from committee members................ 105
Hatch, Hon. Orrin G.:
Prepared statement........................................... 113
Lefgren, Dr. Lars J.:
Testimony.................................................... 9
Prepared statement........................................... 115
Responses to questions from committee members................ 121
Newman, Dr. Katherine S.:
Testimony.................................................... 3
Prepared statement........................................... 128
Steuerle, Dr. C. Eugene:
Testimony.................................................... 12
Prepared statement........................................... 139
Responses to questions from committee members................ 147
Communications
Center for Fiscal Equity......................................... 159
Nellen, Annette.................................................. 162
BOOSTING OPPORTUNITIES AND
GROWTH THROUGH TAX REFORM:
HELPING MORE YOUNG PEOPLE
ACHIEVE THE AMERICAN DREAM
----------
TUESDAY, JULY 10, 2012
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:50 p.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Max Baucus
(chairman of the committee) presiding.
Present: Senators Wyden, Hatch, and Thune.
Also present: Democratic Staff: Russ Sullivan, Staff
Director; Lily Batchelder, Chief Tax Counsel; and Tiffany
Smith, Tax Counsel. Republican Staff: Jim Lyons, Tax Counsel;
and Jeff Wrase, Chief Economist.
OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM
MONTANA, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The hearing will come to order.
I first apologize to the witnesses and others in attendance
for the delay. We had a somewhat unscheduled Senate vote, and I
think we have now concluded the vote, and hopefully members of
the committee will begin to file in.
President Truman once said, ``All of us want our children
to have a better life than we had, and it should be the
constant aim of each generation to make things better for the
next.''
As a father, I know how concerned parents can be about
their children's future. Americans just want their children to
have a fair shot at earning a good living and succeeding in
life. But more and more, American parents worry whether this
dream could come true. These worries are well-founded,
especially for parents who have not been able to climb the
economic ladder as high as they would like.
I used to say--and I believed it strongly--that America was
a land of greatest opportunity. There was more mobility, more
opportunity in America than in any other country in the world.
No more.
In the United States, a child born to a family in the top
10 percent of earners is 23 times more likely to end up
financially well-off than a child born in the bottom 10
percent.
This does not mean that a child from a low-income family
will never make it, but it implies that they face strong
headwinds, where a child from a more fortunate background
benefits from a strong wind behind their back.
The American children from lower-income families face
stronger headwinds than low-income children in other countries.
In a study of the U.S. and nine of our competitors, the United
States comes in dead last in mobility. A Danish child born in
the bottom 20 percent of earners is almost twice as likely to
make it to the top 20 percent as an American low-income child.
This lack of mobility means we are not capitalizing on all
of our citizens' talents and we are betraying the ideals on
which our country was founded. Many of our foreign competitors
are doing a better job advancing the American dream and
opportunity than we are.
So what determines opportunity? What can we do to ensure
that all American children have a fair shot at the American
dream? To find opportunity, children need a high-quality
education. They need skills to be successful.
But an American child from the top income quarter is 10
times as likely to go to college as a child from the bottom
quarter. In 1979, the United States led the world in the number
of people who graduated from college. That was back in 1979. We
are now number 16 out of 34 countries, just above Estonia,
Poland, and Chile. We used to be a leader. We have slipped to
16th.
To succeed, children also need to be healthy and cared for.
They need mothers who are healthy during pregnancy. Lower birth
weights result in children having lower lifetime earnings. They
need parents who have the ability to provide for them. If their
parents work, they need high-quality child care.
Congress has tried to improve opportunities for families
and children through the tax code. There are numerous tax
incentives to encourage work, education, health care, and
savings. The Earned Income Tax Credit and the Child Tax Credit
give low-income parents an incentive to work and help them
provide for their children.
In 2010, the Earned Income Tax Credit lifted 3 million
children out of poverty, and health reform will give more
pregnant women access to quality health care. But many
incentives in the tax system are upside-down. They give the
most help to those who need it the least. Provisions like the
exclusion for employer-provided child care provide more support
for children with parents in high-income brackets than those
with lower incomes.
For example, the most tax savings a family making $40,000 a
year can receive from the exclusion is $750, but a family
making $250,000 can receive twice this amount. For children in
low-income families, this break may provide no benefit at all.
Today's hearing will focus on economic mobility and how we
can use the tax code to strengthen the American dream. It is an
important issue, very important. It is such an important issue
that is very much on people's minds. The Washington Post and
USA Today have stories today on the very study that one of our
witnesses will discuss. The tax system clearly is not the only
way to improve opportunities, but it is an important way. We
should use all the tools that we have.
So, as we work to simplify the tax code, let us ensure that
every child has a fair shot at a richer and fuller life, and,
in the words of President Truman, let us help this generation
make things better for the next.
[The prepared statement of Chairman Baucus appears in the
appendix.]
The Chairman. I do not see Senator Hatch here yet, but when
he arrives we certainly would like to hear from him.
But I would now like to introduce our witnesses. First is
Dr. Katherine Newman. Dr. Newman is the James B. Knapp dean of
the Krieger School of Arts and Sciences at Johns Hopkins
University. Next is Dr. Miles Corak, professor at the Graduate
School of Public and International Affairs at the University of
Ottawa. Our third witness is Dr. Lars Lefgren. He is associate
professor at the Department of Economics at Brigham Young
University. Our fourth witness is Erin Currier. She is the
project manager of the Economic Mobility Project at The Pew
Charitable Trusts. Finally, we have Dr. Eugene Steuerle. Dr.
Steuerle is an institute fellow and Richard B. Fisher chair at
the Urban Institute.
Thank you all for coming. All of you know the drill: your
statements will be automatically included in the record, and I
ask each of you to summarize in about 5 minutes.
Dr. Newman?
STATEMENT OF DR. KATHERINE S. NEWMAN, JAMES B. KNAPP DEAN OF
THE ZANVYL KRIEGER SCHOOL OF ARTS AND SCIENCES, THE JOHNS
HOPKINS UNIVERSITY, BALTIMORE, MD
Dr. Newman. Great. Thank you, Mr. Chairman.
The Chairman. And, as I always say to our witnesses, let
her rip. Just say what is on your mind, right?
Dr. Newman. I am about to do that.
The Chairman. Good. That is what we ask.
Dr. Newman. I am very pleased to have this chance to
contribute to your deliberations on the ways in which the tax
code might facilitate upward mobility, and to do that I draw on
a couple of decades' worth of research, especially in Harlem,
on the Nation's working poor, as well as a wealth of data that
has been contributed by other scholars, especially economists,
who have studied the pathways of other countries whose mobility
rates, as you pointed out, exceed our own.
My aim here is to try to contribute some thoughts on what
kinds of investments might promote mobility and how difficult
it is for working people below the poverty line to make those
investments. I will conclude with some thoughts about the tax
code, on which you have asked us to deliberate.
As you said, it is by now axiomatic that upward mobility
depends on educational attainment. Even in the current economic
downturn, unemployment is far lower among college graduates
than high school graduates, and drop-outs are vastly over-
represented among the Nation's poor.
The wage premium to higher education is substantial, and of
course, accordingly then, ensuring that children of the working
poor complete high school and attend college or seek some kind
of advanced training is probably the best recipe for upward
mobility.
But staying on that track is very sensitive to the quality
of early childhood education. Low-wage jobs leave families with
very few resources to invest in the next generation, and hence,
among the families that I studied in Harlem, child care options
were meager in supply, erratic, and poor in quality.
In the 14 years that I followed working and near-poor
families in Harlem and the outer boroughs of New York City, my
observations of their child care arrangements nearly always
left me concerned about the fate of the next generation.
The most common source of child care for the working poor
was a relative or a neighbor, often with four or five other
children to take care of. The best of these settings would see
young children scribbling in coloring books once in a while,
but very often they were left to entertain themselves while
grown-ups in the room watched television or ignored their
presence.
Rarely were these children mistreated. They were fed, they
were warm in the winter, and they were kept out of harm's way.
Their mothers knew that they were safe, and that is not
unimportant in the troubled neighborhoods in which they live.
But I rarely observed attempts to engage these children, much
less to introduce them to the kind of formal daycare or early
childhood stimulation that more fortunate children receive.
One example from my research may serve to illustrate the
problem. Danielle Wayne--this is a pseudonym--the divorced
mother of three children, returned to the workforce during the
course of my 8 years of following Harlem families. Her older
children, ages 8 and 10, did very well in school, having
benefitted from her undivided attention and engagement in their
schools when they were very young.
But her youngest child, a 2-year-old named Safiya, had a
very different experience. When Danielle went back to work, she
took Safiya to her ex-mother-in-law to be looked after during
the day. At the cost of $50 a week, which was the most she
could afford--and she was grateful for that care--the 60-year-
old grandmother accepted that child. I visited Safiya and her
grandmother to see how she was doing and what she was doing
during the day.
Her daycare was in a 2-bedroom apartment in the public
housing unit in the center of Harlem. Her grandmother had three
other children to look after. The day I arrived, the TV set was
set to the ``Jerry Springer'' show, and the kids were glancing
up to see topless women.
One of the grandmother's other children, a woman in her
mid-30s, was sitting on the couch in a stupor. She explained to
me that she had four teenaged children of her own but was no
longer living with them. The grandmother explained to me later
that her daughter had a serious drug problem and had nowhere
else to turn for shelter.
The best we could say about this childcare situation for
Safiya is that it is custodial. And it is taking a toll on that
little girl. At an age where children in early childhood
education are playing active games, learning to help, to be in
groups, starting to recognize their colors, Safiya had a 2-word
vocabulary: ``no'' and ``shut up.'' That is it. She never said
another thing to me or anyone else.
In the setting where she was spending more than 8 hours a
day, it is not likely she is going to learn much more than
that. That is not going to put this little girl in a good
position to enter kindergarten ready to learn.
How do we avoid unproductive pathways like this? Well, in
other countries the extension of universal or large-scale
programs for preschool has become fairly common, and their
experience reinforces the importance of this kind of
opportunity.
The studies that we have from these other countries are
following children all the way from their early childhood to
their adult years so we can see exactly what kind of impact
that investment had.
Let me just give you a few examples. In Denmark, the
significant impact of preschool for children ages 1 through 6
on completing schooling and on earnings at the age of 22 to 30
is huge, and with larger effects for disadvantaged children.
We see positive effects of preschool on grade retention, on
test scores, on high school graduation, and on adult wages in
France. Here, too, the effects are particularly large for
children from disadvantaged households.
More years in school, higher rates of college attendance,
and greater labor market participation in Norway; again, the
effects much larger for low-income children. Those are studies
that can look at people all the way from zero to 30.
We have other studies from Germany, India, Norway, Sweden,
and Uruguay that just look at adolescents, and there too we see
that earlier childhood education experience leads to better
school enrollment and achievement, especially, by the way, for
immigrant children, where exposure to the language of the host
country is positively affected by entering school early and
provides the maximum time for them to acclimate.
What these studies are telling us is that early childhood
education makes a very positive difference in the educational
performance of children over the later years. What can the tax
code contribute to this equation? The most important
contribution it makes to educational outcomes for low-income
families occurs, as you mentioned, through the Earned Income
Tax Credit.
One study that looked at the impact of receiving the EITC
on the math and reading achievement of 5,000 children, matched
to their mothers in the National Longitudinal Survey of Youth,
found that a $1,000 increase in income generated by an
increasingly generous EITC raised combined children's math and
reading test scores by 6 percent of a standard deviation in the
short run, and again the gains were larger for children from
disadvantaged households.
So what all of this research is telling us is that the
injection of resources into households, either through the EITC
or through income increases that mimic what the EITC provides
for low-income households, is paying off in the educational
performance of children. Those knock-on benefits of that
improved track record surface later in the labor market and,
hence, in intergenerational mobility.
But what can you do to improve the chances that children
from low-income households will stay that course? Specifically,
what can the tax code do? Well, part of the answer, as you
mentioned, is already with us: enlarge, or at least preserve,
the Earned Income Tax Credit and the Child Tax Credit, both of
which put resources in the hands of parents.
There is a lot of debate about why that works as well as it
does, or rather what the pathway is from higher household
income to greater educational attainment and earnings.
Candidate explanations include more money to spend on
children's education, greater household stability, parents who
are less stressed and hence do a better job of raising their
children, and health outcomes which prevent the disruption to
adult employment that can derail children or interrupt their
own attachment to schooling. My guess is that all of these
factors matter.
When the States follow the lead of the Federal Government,
the benefits of the EITC are amplified.
The Chairman. I am going to have to ask you to wrap up the
best you can, Doctor.
Dr. Newman. All right. Let me do that.
So let me just mention a few other instruments besides the
EITC. I do not think we should forget the other age groups that
may be affected by the investments we make possible. Let me
speak about teenagers and young parents. Anything we can do
through the tax code to encourage teens to stay in school and
perform at higher levels will impact intergenerational
mobility.
Millions of inner city teens are left on their own in the
after-hours of school. Supposing we were to provide tax
incentives for parents to pursue high-quality after-school, as
well as early childhood education? In addition, studies of
long-term benefits of college education among young parents,
especially mothers, on the mobility of the next generation show
important results. First-time college students from low-income
backgrounds raise their children differently than people from
the same kinds of families who do not attend college. It is in
college that they learn about the benefits of museums, reading
aloud, doing homework, visiting the zoo, and so on.
When we follow those kids 30 years later and we look at
what the impact of education on their mothers was for their
mobility, we see very significant effects on their educational
performance. Hence, the American Opportunity Tax Credit, the
Lifetime Learning Credit, all of these instruments through the
tax code that make it possible for low-income people to attend
college in greater numbers, pay off not only in their
intergenerational mobility, but in that of their children.
Thank you.
The Chairman. Thank you, Dr. Newman, very much. Very
interesting.
[The prepared statement of Dr. Newman appears in the
appendix.]
The Chairman. Dr. Corak?
STATEMENT OF DR. MILES CORAK, PROFESSOR, GRADUATE SCHOOL OF
PUBLIC AND INTERNATIONAL AFFAIRS, UNIVERSITY OF OTTAWA, OTTAWA,
ONTARIO, CANADA
Dr. Corak. Thank you, Senator, for the opportunity to
engage in this conversation.
You summarized, I think, the facts on intergenerational
mobility, and particularly international comparisons, quite
clearly. What I would like to do in my 5 minutes is focus on
the drivers. I think it is very important to understand the
underlying causes, for two reasons.
One is, because the facts that we are talking about relate
to a group of people born in the 1960s who went to school in
the 1970s and 1980s and participated in the labor market of the
1990s and 2000s. So, if we wanted to get a sense of what will
happen to the young people of today, we need to learn from that
experience, understand what drove it, and make reasonable
guesses in that sense. The other reason we have to focus on the
drivers, of course, is because, if we want to do intelligent
public policymaking, we have to understand the underlying
causes.
My first message to you is that there is no single silver
bullet in this literature. The causes of intergenerational
mobility are complex and they reflect the interaction of three
broad forces: the family, the labor market, and public policy.
Families that are stable and constructive can effectively
raise their children and support them through all the
transitions that they have to go through in their life, not
just the early years, not just the primary schooling years, but
also the teenaged years and the interface with the labor
market. The stronger families are, the more mobility there will
be.
Second, the more inequality in labor markets there is, the
less mobility there is; more unequal labor markets with a
higher return to education change incentives and change
opportunities for families and lead to less mobility.
Finally, the third row is public policy. Public policy, to
the extent that it is progressive, to the extent that it is
relatively more advantageous to the relatively disadvantaged,
will promote mobility.
So, in the time that I have, I just want to talk about two
stereotypical societies, if you will, in which the interaction
between these forces is very different. The first society I
will call a ``2nd-chance society.'' Canada and Australia might
be 2nd-chance societies, if you will.
The second is a society that has more tracks to it. If you
get on the right track, you are destined to move forward, or
you could move backward. There are not as many second chances.
I will call this sort of a ``3-strikes-you-are-out'' society,
if you will. The U.K. and the U.S. might sit towards that
extreme.
In a 2nd-chance society, families are able to invest, not
just in the monetary well-being of the children, but also the
non-monetary well-being. So money matters, but not just money.
If we structured income support in a conditional way to young
families, for example, and used something like the EITC, we
should also recognize that the non-monetary resources available
to children are also diminished, that we also have to provide
more flexibility in work arrangements so that parents can
balance the stresses of work and life more constructively. We
also need more effective and creative child care to counter the
kind of difficulties that Dr. Newman just spoke about.
Second-chance societies keep the relative and absolute
poverty rate of children low, and they also reduce the risk of
poverty of expectations and poverty of experience.
In the early years, 2nd-chance societies move towards fully
integrating children into the schooling system. In many
societies, particularly in Canada and Australia, there is talk
and movement towards full participation of 4- and 5-year-olds
in the schooling system on a full-time basis.
In 3-strike societies, we begin to see in the early years a
differentiation according to family resources, with more use of
private sector resources on high-income families, and other
families dropping by the wayside.
Second-chance societies also allow children to drop in.
There is always the risk of dropping out, but education systems
are created more flexibly so that children can drop in later on
in life. In 3-strike societies, it is much harder to drop back
into school at a later stage in life, and the education system
is structured very linearly.
Quality also does not vary very much. The quality of the
schooling system does not vary very much in 2nd-chance
societies. The funding for the schooling system is more broadly
based and not necessarily based on a narrow property tax basis,
and the quality of schooling does not get reflected in the
housing market to the same extent it does in 3-strike
societies. So funding the schooling system through a narrow
property base accentuates labor market inequalities, and they
get interfaced into the family.
Finally, I want to point to the fact that post-secondary
education offers a lot more choices in 2nd-chance societies.
There is a developed technical stream and community colleges as
an alternative to university. While there may be high tuition
fees, there are also strong bursaries.
To the extent that people use loans, 2nd-chance societies
make the repayment of those loans contingent on income so that
you do not necessarily have to be bound by these heavy debts to
the same extent if you experience spells of unemployment.
Finally, I would point out that, in the interface with the
labor market, connections matter. Families continue to play a
role in helping their young adults transition to the labor
market. In some societies, as many as 4 out of 10 young
children have at some point worked for the same employer as
their father.
Also, if there are internships used, they are much more
broadly based. One can imagine a system in which people from
lower socioeconomic backgrounds have a voucher attached with
them so that they can accept unpaid internships and get payment
from the States so that internships are not based necessarily
on just family background.
Finally, in 2nd-chance societies there are wealth or estate
taxes, or inheritance taxes, that level the playing field for
the next generation and ensure a virtuous circle.
Thank you very much.
The Chairman. Thank you, Dr. Corak. That was very
interesting.
[The prepared statement of Dr. Corak appears in the
appendix.]
The Chairman. Dr. Lefgren, you are next.
STATEMENT OF DR. LARS J. LEFGREN, ASSOCIATE PROFESSOR,
DEPARTMENT OF ECONOMICS, BRIGHAM YOUNG UNIVERSITY, SALT LAKE
CITY, UT
Dr. Lefgren. Thank you, Chairman Baucus and members of the
committee.
In the United States, a 10-percent wage disadvantage in
fathers' long-term income translates into roughly a 6-percent
wage disadvantage in a son's long-term income. This suggests
that the son of a poor father will have a strong tendency to
have low income himself. Estimates from other developed
countries, as you mentioned, Senator Baucus, imply much less
persistence in income levels from father to son.
These results have caused consternation because they appear
to refute the premise of the American dream that anyone can be
successful. Indeed, if a person's economic position is
determined entirely by the economic position of one's parents,
independent of the person's skill or potential, there would be
nearly universal condemnation of the institutions that led to
such an unfair outcome.
Furthermore, it would lead to a poorer society as the
mediocre children of wealthy parents were promoted to jobs
beyond their capabilities, while the brightest children of the
poor languished in occupations that failed to harness their
full potential.
It would be equally symptomatic, however, of poor labor
market institutions if there was no correlation between
parents' income and that of their children, because capable
parents tend to have capable children. So, for example, the
heritability of IQ is on the order of 0.7. A zero correlation
between the incomes of children and parents suggests that our
labor market fails to reward skill.
Rewards for skill and hard work are essential signals for
sorting our most talented workers to the fields and occupations
in which they produce the most value. When we fail to allocate
skill to its highest productivity use, we become poorer as a
society.
I will now compare the special cases of Sweden and the
United States. These countries represent the extremes of
observed intergenerational income inequality in the developed
world. The comparison highlights the tension between economic
efficiency and equality as well as the importance of efficient
human capital investments.
The degree to which paternal income difference persists to
the next generations is about 26 percent in Sweden, compared to
61 percent in the United States. While Sweden is a more
egalitarian country, Swedish citizens have lower incomes on
average than do Americans. Once one adjusts for how much goods
and services cost in Sweden, per capita GDP is about 20 percent
less in Sweden than it is in the United States.
Sweden achieves this level of equality in several ways.
Generous wages for many occupations are collectively bargained
at the industry level and assume the role of the mandated
minimum wage in other countries. A large public sector provides
many individuals with a middle-class lifestyle. High taxes
substantially reduce differences in take-home pay across
workers. Aronsson and Walker discuss how these labor market
institutions create incentives to limit work hours and
educational investments.
These institutions also dole out incentives for individuals
to enter demanding occupations where the value of their work
product is high as opposed to pleasurable, but potentially less
useful, occupations. High-quality public preschools, as well as
primary, secondary, and college education, are provided to all
citizens at little or no cost.
Conversely, in the United States, levels of unionization
are low and falling. The minimum wage is low and binds for only
a small fraction of the population. Tax rates and the size of
the public sector are both low relative to other developed
countries. The financial return to education is quite high.
Collectively, the tax code and labor market institutions of
the United States do relatively little to equalize incomes at a
point in time or across generations. They do, however, provide
an efficient environment for individuals to undertake
educational investments and to employ their skills in a setting
in which they are most highly valued.
In the United States, primary and secondary school is
provided free of cost. Access to publicly provided preschools
through programs such as Head Start is available to some, but
not all, families. Individuals have access to low-cost
community and State colleges, and also have access to loans and
grants to cover remaining expenses.
For well-prepared students, the United States has the best
university system in the world. The United States does not,
however, provide a strong educational foundation to the
disadvantaged children. In Chicago, only 56 percent of students
graduate from high school. Most of those who drop out and many
of those who graduate have substandard numeracy and literacy
skills.
While existing programs such as No Child Left Behind and
title I have had some mixed success in increasing student
achievement, improvements in educational policies should be an
ongoing congressional priority. Research by Heckman and others
underscores the importance of early childhood education in the
formation of the soft skills required for success in school
life and the workplace.
In conclusion, it is unclear what the right level of
intergenerational income mobility ought to be. Tax and labor
market policies designed to foster an egalitarian wage
distribution and high levels of intergenerational mobility
distort incentives for efficient educational investments,
occupational choices, and effort levels.
In this regard, Congress must thoughtfully consider the
trade-offs between economic efficiency and equality. However,
the failure to foster the educational development and success
of all of America's children stunts the economic potential of
many citizens, lowers our collective national wealth, and
increases intergenerational inequality in a manner that most
Americans, I believe, would consider unfair.
Thank you.
The Chairman. Thank you, Dr. Lefgren.
[The prepared statement of Dr. Lefgren appears in the
appendix.]
The Chairman. Ms. Currier?
STATEMENT OF ERIN CURRIER, PROJECT MANAGER, ECONOMIC MOBILITY
PROJECT, THE PEW CHARITABLE TRUSTS, WASHINGTON, DC
Ms. Currier. Chairman Baucus and members of the committee,
thank you for inviting me to testify today. I manage Pew's
Economic Mobility Project, which is a nonpartisan effort to
establish a fact base on economic mobility.
Today our project released the newest data available on
intergenerational mobility in the United States, revealing a
mixed picture of Americans' access to opportunity.
On the one hand, there is a glass half full, because 84
percent of Americans have higher family incomes than their
parents did at the same age, and across all levels of the
income distribution this generation is doing better than the
one that came before.
But there is also a glass half empty, because Americans
raised at the top and bottom of the income distribution are
highly likely to stay where their parents were, a phenomenon
called ``stickiness at the ends.''
Of those whose parents were in the bottom fifth of the
income distribution, 70 percent remain below the middle as
adults. Of those raised at the top of the income ladder, 63
percent never fall to the middle as adults. This stickiness at
the ends challenges the notion that the United States promotes
equality of opportunity. It is further underscored, however, by
international comparisons of economic mobility, which show that
the United States has less relative mobility than Canada and
many European nations.
A recent study on economic mobility across 10 countries
found that, in the United States, there is a stronger link
between parental background and children's outcomes than in any
other country investigated. The research found that family
background begins affecting children's outcomes as early as
they can first be measured, even by age 3.
The variation in outcomes across countries suggests that
policies and institutions can and do influence economic
mobility. A person's mobility outcome is not predetermined, and
understanding the drivers of economic mobility can enhance
opportunity in America.
Our research has found that a host of factors help push
Americans up the economic ladder, and some push them down.
Today I will mention three such factors: post-secondary
education; savings; and neighborhood poverty.
Post-secondary education is extremely powerful. It both
promotes upward economic mobility from the bottom and protects
against downward mobility from the top and the middle. Having a
4-year degree triples the chances that someone who starts in
the bottom income quintile will make it all the way to the top.
Personal savings are also influential. When families are
able to create their own safety nets, they are less likely to
be derailed by financial emergencies and are more equipped to
make mobility-
enhancing investments such as college for themselves and their
children.
On the other hand, one of the most powerful drivers of
downward mobility is being raised in a high-poverty
neighborhood. Americans raised in the top three quintiles who
spend their childhood in a high-poverty neighborhood are 52
percent more likely to be downwardly mobile.
Considering this data, it is important to assess the degree
to which Federal policy is mobility-enhancing and who benefits
from the investments currently made. In fact, the government
spends a great deal to encourage movement up the economic
ladder, but, because the vast majority of that spending is
delivered through the tax code, it largely misses families at
the bottom who do not owe income taxes.
In 2009, a group of bipartisan advisors to the Economic
Mobility Project drafted a set of policy recommendations to
enhance economic mobility in the U.S. They called for a
portfolio shift in Federal investments to better target low-
and moderate-income families. Public opinion polling suggests
Americans support this goal. An overwhelming 83 percent want
the government to boost mobility for the poor and middle class,
a feeling that cuts across party lines.
Americans believe in the American dream, and they also
believe that our Nation is, and should be, exceptional in its
ability to promote opportunity for all citizens, regardless of
family background. Still, Americans are increasingly concerned
about their children's economic chances and believe that
policymakers can, and should, help level the playing field.
An emerging body of research provides insight into the
drivers that influence economic mobility and serves as a
starting point for dialogue and action on how to promote
economic mobility for all Americans.
Thank you.
The Chairman. Thank you, Ms. Currier.
[The prepared statement of Ms. Currier appears in the
appendix.]
The Chairman. Dr. Steuerle?
STATEMENT OF DR. C. EUGENE STEUERLE, INSTITUTE FELLOW AND
RICHARD B. FISHER CHAIR, THE URBAN INSTITUTE, WASHINGTON, DC
Dr. Steuerle. Thank you, Mr. Chairman, Mr. Wyden, Mr.
Thune. It is a privilege to testify before you again. Nothing
exemplifies the American dream more than the possibility that
each family can get ahead, and through hard work advance from
generation to generation. No committee, I believe, in Congress
has more influence over this issue than does the Senate Finance
Committee.
I am not claiming government can solve these problems. I
think mobility is largely induced by the hard work and the
efforts of our citizens, but this committee has a great deal to
say about how government makes possibilities available.
Today, I suggest that mobility across generations is
threatened by three aspects of current Federal policy. First,
we have a budget for a declining Nation. It is one that
promotes consumption ever more and investment, particularly in
the young, ever less.
Second, we have relatively high disincentives to work and
save, especially for those who move beyond about a poverty
level of income. Third, we have a budget that, largely through
the tax code, favors mobility for those with higher incomes,
while promoting consumption but discouraging mobility for those
with lower incomes.
So let me elaborate briefly. First, in many ways we have a
budget for a declining Nation. Even if we would bring our
budget into balance or to sustainability--and we are a long way
from achieving that goal--we would still have a budget that
allocates smaller shares of our tax subsidies and our spending
to children and investment and ever-larger shares to
consumption.
Right now, the Federal Government is on track to spend
about a trillion dollars more annually in a decade in spending
and tax subsidies. The number might be slightly smaller if the
Republicans are in power, it might be slightly larger if the
Democrats are in power. That is a trillion dollars more
annually that is scheduled to be spent.
Yet, if you look at those projections, you will find that
the programs that might promote mobility, such as education or
job subsidies or programs for children, would get nary a dime
of that trillion dollars more a year. Right now, those relative
choices are reflected in both Democratic and Republican
budgets.
Second, consider that one of the many ways that the
population rises in status relative to others is by working
hard and saving a higher portion of their income or their
wealth. Discouraging such efforts can reduce the extent of
intergenerational mobility, which I will remind you is largely
measured by their command over private income and private
resources, not their command over public resources.
One way to look at the disincentives facing lower-income
households is to consider the effective tax rates that derive
from combining together the direct taxes that you see in the
tax system and the phase-outs that are prevalent in so many of
the tax subsidies in welfare and benefit programs.
After reaching about a poverty-level income, those
moderate-
income households with children often face marginal tax rates
that are 60, 80, or even 100 percent when they earn an
additional dime of income.
Finally, in a study I led for The Pew Economic Mobility
Project with Ms. Currier here, we concluded that a sizeable
slice of the Federal budget--in fact, about $746 billion, or
$7,000 per household in 2006--did go to programs that arguably
tried to promote mobility.
Unfortunately, almost three-quarters of the total comes
mainly through programs such as tax subsidies for home
ownership and other saving incentives that flow mainly to
middle- and upper-
income households. Moreover, some of these programs inflate key
prices, such as the prices of homes, and thereby actually
detract from the mobility of low- and moderate-income
households.
Finally, I would like to add a note about some current
opportunities. Outside of education, and particularly early
childhood education and health, if Congress wishes to promote
the mobility of lower-income households as well as protect the
past gains of moderate- and middle-income households that are
also now threatened, almost nothing succeeds more than putting
them on a path of increasing ownership of financial and
physical assets that can carry forward from generation to
generation.
Two opportunities largely neglected in today's debates may
be sitting right at our feet. First, rents have now moved above
home ownership costs in many parts of the country.
Unfortunately, we seem to have adopted a housing policy in this
Nation that encourages low-income households to buy when the
market prices are high, and then, when the market prices drop,
we encourage them to sell and not to buy. This does not seem to
me to be a particularly advantageous home ownership policy for
these households.
Second, pension reform is a natural accompaniment and add-
on. I am not referring to the old individual account debate,
but I am talking about pension reform. It is a natural add-on
to the Social Security reform that I believe is around the
corner that is often not being discussed. So, I hope you will
give some consideration to these two opportunities.
In conclusion, the hard future ahead for programs that help
children, invest in our future, and promote mobility for low-
and
moderate-income households does not necessarily reflect the
aspirations of the American people, or I believe of either
political party, and I appreciate the efforts of this committee
in moving on this front today.
Thank you.
[The prepared statement of Dr. Steuerle appears in the
appendix.]
The Chairman. Well, thank you all. I am going to start with
you, Dr. Corak. I do not know if you suggested many specific
suggestions as to what we can do in this committee to address
the phenomena you are talking about, the 2nd-chance and 3-
strikes-you-are-out. I assume 2nd-chance is your preferred
choice between the two. But just, what would you advise that
this committee consider to help kids, help more mobility? That
is the subject of this hearing.
Dr. Corak. Well, different policies at different stages of
the child's life cycle. Perhaps, let me focus on the very last
stage of the transition to the labor market. What I was trying
to say, for example, is that children from more privileged
backgrounds have more opportunities and more connections
available to them.
Let us imagine how internships work in this country. My
understanding is that many internships are unpaid, and this is
valuable job experience for young people. They have to be able
to afford to take an unpaid internship, and that involves
family support. So these internships generally, or the more
valuable ones, may go to people of more privileged backgrounds.
Why not give to children of less-privileged backgrounds a
voucher, if you will? If they find an unpaid internship, the
State will support them for that summer and give them that kind
of work experience. That is one example.
The Chairman. Let me ask all five of you your reaction to
this. What about universal service, with every younger person
in America from the ages of, say, 18 to 22 or 23, whatever,
having to serve in the Peace Corps, or military service, for a
couple of years? My thought is that it would be a way for our
younger people to learn about other people, learn about the
world, learn about other people's conditions, and have a very
positive educational effect. I do not know what the latest
studies are, how expensive it would be.
I mean, clearly I could think of some people who would say,
oh, no, that impinges on our individual freedoms or our
liberties and so forth. But my thought is, if it could be made
to work, it would help bring America together again. I think
about World War II and all of that, we were a country together
and so forth. We were together in World War II.
Now, of course we had an external threat, an existential
threat back then. But we are being threatened now. It is a
stealth threat. It is harder to see, but it is out there. I
mean, this is just stunning that we are no longer the number-
one country in the world in mobility, and we are sinking, I
think, in that respect.
So I would just like your candid, honest thoughts whether
universal service would help or not help, whether it is
something we should think about. Is it just not worth thinking
about, and let us try to find other ways to deal with this
issue? I will go the other way and go down this way this time.
Dr. Steuerle?
Dr. Steuerle. Senator, I am not sure that I would mandate
universal service, but I think we could make many of the types
of programs that we provide to the public conditional upon
service, such as, aid for college could be limited, or people
could avoid having to pay off their loans if they participate
in service. I think we should also perhaps require that doctors
who go through medical school provide some sort of service in
exchange for all the subsidies they get. I think there are a
lot of ways of encouraging service. I do not know that you
would have to go all the way to a mandate.
The Chairman. So you would look creatively to find ways to
get incentives to serve on a voluntary basis?
Dr. Steuerle. Yes.
The Chairman. That is your suggestion. All right.
Ms. Currier?
Ms. Currier. Well, I guess I will pivot a little bit and
just mention that our project has conducted two public opinion
polls, one in 2009 and one in 2011. In both cases, Americans
solidly identified things like hard work and ambition as the
key drivers of mobility.
But they also believe that the government has a role to
play in helping level the playing field to the degree that
policies can do that, can expose children from all backgrounds
to better educational attainment, better jobs, better labor
force participation. I think you would see quite a bit of
support from the American public.
The Chairman. All right.
Dr. Lefgren?
Dr. Lefgren. I am personally actually very sympathetic to
the benefits of service. If service is mandated, in my opinion,
then it loses much of the potential benefits. Mandated charity
really is not charity at all.
Even though I am actually very sympathetic with Dr.
Steuerle's view that there are potential levers to provide
incentives for service, I think a key aspect of the growth
aspects of service and sacrifice is the voluntary nature of it,
and it is important that people bear some of the costs of the
service that they are getting.
The Chairman. Yes. I appreciate that. We will have two more
to answer. For whatever it is worth, my son went to school
where service was ``required.'' Community service was required.
It is clear to me he is a much better person as a consequence,
there is no question about it. But that is a little bit
different.
Dr. Corak?
Dr. Corak. I think your call for that option sort of
reflects a need to develop community in a spirit of the
collective. My own sense is--I am not informed on what the
long-term benefits of service at the later part of the age
spectrum would be, but I can certainly imagine starting that
much earlier in the schooling years, in the sense of universal
provision of high-quality care in the early years. It would
seem to me the community would have to start much earlier than
that.
There is also the possibility certainly of having volunteer
hours attached to the possibility of graduating from high
school, so you could imagine having each child spend a certain
amount of time in some community-oriented activity, and they
would have to have X number of hours to graduate.
The Chairman. All right.
Dr. Newman?
Dr. Newman. Mr. Chairman, I am very sympathetic to your
point of view. I think universal institutions generally do pay
off in mobility. That is what public schools are all about.
What you suggested is sort of an extension, if you will, of the
same idea, that all Americans would have the opportunity to
serve. This is beyond the high school level. But what they
learn when they do are new skills, new opportunities, new ways
of doing work, new cultures, as you have said.
In that sense, universal service provides the same kind of
human capital benefit that the other universal institutions we
have do. So I think anything that you can do through this
committee to extend opportunities to all Americans, starting at
the earliest ages and carrying them all the way through to that
later and later transition to adulthood in the mid-20s, would
be enormously beneficial.
The Chairman. Thank you very much. My time has expired.
We are honored to have the Senator from Utah, Senator
Hatch, with us today. Senator?
Senator Hatch. I am happy to be with you.
The Chairman. The ranking member of this committee.
Senator Hatch. I will put my opening statement in the
record.
[The prepared statement of Senator Hatch appears in the
appendix.]
Senator Hatch. I apologize for being late, but I was on the
floor making some remarks that had to be made.
We welcome all of you, especially you, Dr. Lefgren, from
Brigham Young University. We are really happy to have you here,
and all of you, as a matter of fact.
Let me start with you, Dr. Corak. Figure 2 in your written
testimony, which has recently been labeled the Great Gatsby
Curve, shows the correlation between measures of inequality and
mobility across countries. Now, there are, of course,
measurement issues associated with the data. Not everyone would
agree with the inequality measure, perhaps, that you use.
In any case, your Gatsby Curve shows a positive relation
between inequality and lack of mobility across countries. You
suggest that the positive relation can give us a ``rough'' way
to see outcomes of all of the forces governing
intergenerational earnings and inequality.
You also say in your testimony that ``this picture is one
of association,'' yet you have written elsewhere that ``to
dismiss this relationship as purely a statistical artifact or
myth, with there being no causal impact between inequality and
opportunity, would be a mistake.''
I certainly do not dismiss your relationship as necessarily
being an artifact or myth, but it is important not to confuse
association with causality. Nonetheless, some people go so far
as to use the rough correlation you present to make structural
forecasts about how inequality today will influence mobility in
the future. And while I do not doubt the association you
present, given the data that you use, I think it is a stretch
to treat it as structural and something that can be used for
forecasting.
So I have a couple of questions intended to help me
understand what your figures are supposed to show. First, do
you believe that your Gatsby Curve establishes statistically
that lower mobility in a country, from whatever year your
mobility data may have been obtained, causes the inequality
measures that you say are estimates from ``around the year
2000,'' or maybe that greater inequality around the year 2000
somehow was caused by less mobility for children who were born
and reared decades ago in far different policy and economic
environments?
Second, I wonder if you could discuss evidence that the
U.S. is moving up your curve and how robust the evidence is
across various measures of inequality.
Finally, you have recently been quoted as saying that ``the
most important thing that the U.S. is leaving behind as it
moves up the Great Gatsby Curve is the vision of itself.''
So I wonder why you take from your curve or other research
an impression that we in the United States are losing our
vision of ourselves.
Dr. Corak. Well, thank you, Senator.
Senator Hatch. The question was too long, I know.
Dr. Corak. Yes. But let me divide it up into the three that
you suggested. First, is the relationship causal? Let me make
clear, Senator, that I do not believe that if you simply gave
people money, you would solve all of these problems.
Money certainly matters. People in lower incomes certainly
face stresses in life, but more than money matters. That is why
we should not interpret that curve as something that we can
move along by just tax-and-transfer policies, for example. It
is not causal in that sense.
It is a nice way of describing a whole series of
transitions, or the outcome of transitions that children make
through their lives. Inequalities begin to get imbedded in
children's lives in the early years. We know that there are
inequalities in health outcomes in the very early years. That
is one causal step that helps build that figure.
We know that there are inequalities across neighborhoods
and schooling. Those are causal. They build another step. We
know that there are inequalities to good jobs and access to
good jobs. That is another layer that gets played onto the
whole process. In the end, you get a picture of that sort.
As for losing our vision of ourselves, all I am stating in
that statement, which was in, I believe, Business Week earlier
this week, is the concern of this committee right now, the
concern that all children should be able to become all that
they can be.
In the United States, if you look closely at the data,
there is in fact a good deal of mobility in the middle parts.
What makes society different is the stickiness at the two ends.
That is related to inequalities in the labor market and access
to important institutions. If those continue to grow and
exacerbate over time, it is hard to imagine the situation
changing for the current generation compared to the people who
were part of that graph. Does that help?
Senator Hatch. That helps. That helps a little bit.
I will turn to Senator Wyden.
Senator Wyden. Thank you very much, Mr. Chairman. I want to
thank all of you.
Let me begin, if I might, with you, Dr. Steuerle. You have
been a veteran of the tax reform wars. I believe real tax
reform gives everybody, not just those who are born on third
base, the opportunity to get ahead. The current tax system
primarily benefits those who own the ballpark.
When you look at your numbers in particular, you come to
the conclusion that, under the current tax code, the younger
you are, the less income you make, the less our government does
to boost opportunity for you to get ahead. That sure is a
poster child for a tax system that is in the business of
picking winners.
So my first question to you is, would it not make sense, as
a fundamental principle of tax reform, to clean out a lot of
the special interest clutter, to hold down rates for everybody,
and use it as a ladder to create more opportunity, especially
for young people who are not getting those opportunities early
on that you have described?
Dr. Steuerle. Senator Wyden, I certainly agree with your
conclusion, but let me try to answer this in a way that I think
is fairly bipartisan.
Senator Wyden. What I have described, as you know, is what
Senator Coats and I have offered. It does not get more
bipartisan than that.
Dr. Steuerle. That is what I said: I am agreeing with you
on that. I guess where I am going along that path is, I want to
distinguish between size of government and allocation. The
issues you are raising have to do with how we allocate the
budgets, which also, I think, reflects a little bit the
previous question, the previous discussion.
We actually have a social welfare budget in the United
States, via the tax subsidies and the direct spending, of about
$30,000 a household. That is not a trivial budget. We could
argue whether it should be $35,000 or $25,000. A lot of it is
in the tax code, a lot of it is in other parts of the direct
spending system.
There are ways of taking that money and reallocating it so
that it more favors, not just lower-income households that are
excluded from some of these tax breaks you are talking about,
but also so that it moves more on the mobility side of the
budget.
I kept emphasizing that what we have now is a budget that
favors consumption, so low-income households are not left out,
for instance, of the housing programs. But they are encouraged,
for instance, to take rental housing where they might get
rental subsidies, but not to own, whereas the subsidies for
ownership, which are in the tax code, they are not encouraged
to participate in.
So it is not just upside-down in the tax code, it is
upside-down across both the tax code and the social welfare
system. I think there are ways of reallocating this money that
would favor mobility in ways that I think that both political
parties would favor. Many of these are in the tax code, many of
them are also in the social welfare system.
Senator Wyden. Ms. Currier, let me turn to you, because I
think you all are doing extremely important work as it relates
to upward mobility at Pew. I am especially attracted to your
ideas about personal savings. I mean, in effect this is an
opportunity for a family to create their own safety net.
In this regard, Senator Coats and I have proposed creating
a new American Dream account which could be used for any
purpose. What we would like to do is particularly address some
of the judgments that you are making in terms of how young
people could benefit from enhanced savings.
How would you go about, at this point, setting up a new
kind of savings opportunity? Where would you start it, and how
would you use it in a way so as to create the best possible
array of incentives for young people?
Ms. Currier. Well, I think, as you know, our project has
been fortunate enough since its inception to work with a
bipartisan group of thought leaders and advocates, including
Dr. Steuerle. They reflect views from across the political
spectrum.
A few years ago, they worked with our project to develop a
set of policy recommendations that they unanimously agreed
would enhance economic mobility. One set of those policy
recommendations falls under the category of financial capital
and includes a host of recommendations specifically about ways
that families across the income distribution can develop
savings.
One of their policies includes child savings accounts and
establishing accounts early in life so that children from the
very beginning have opportunities to become more financially
literate, build expectations for themselves about how that
money could be used for human capital development, and also tap
into behavioral economics, giving people an easier opportunity
to invest in themselves and their children.
Senator Wyden. Mr. Chairman, if I could just ask one
additional question.
On education--and I think I would like to ask you this
question, Dr. Lefgren--Senator Rubio and I have teamed up to
propose a bill on higher education. You have been very
interested in this field over the years.
What Senator Rubio and I are proposing is called the Right
to Know Before You Go Act, so as to help particularly college-
bound students deal with this mountain of debt that so often
they rack up. It has really become the 2nd-biggest investment,
after buying a home, in their life.
I know that you have looked at this issue, particularly as
a springboard to economic mobility for young people. What kinds
of Federal policies would you suggest that could help young
people who are getting shellacked by these enormous debts that
they are facing for higher education?
Dr. Lefgren. One thing that I actually want to make clear
is that higher education is still one of the best investments
around. If you look at the economic literature, the returns
from education have not been declining, they have actually been
increasing over time.
So I think it is important that, as we move forward, we do
not send the message to our young people that higher education
is a boondoggle or is a bad investment. It will, for most
people, be the best investment that they can ever make.
Now, there are a couple of problems. A lot of the mountains
of debt, or the big problems, are people who go to expensive
private colleges with a major in things that do not have a very
high financial return, so there is an issue of major choice.
Then there is also an issue where you look at some of the for-
profit colleges that cater to disadvantaged applicants. In some
ways they provide an opportunity, but many of those people who
go through those programs have very poor outcomes.
I think what I would like is for there to be just a lot
more information. For example, if colleges sort of gave
information on what a typical labor market outcome is for
people who go through their institution or people who go
through their program, that would allow people to make informed
decisions, but still make efficient decisions.
Senator Wyden. That is exactly what Senator Rubio and I are
proposing. We want young people to have that kind of
information in front of them. The fact of the matter is, today,
in many respects, you can get more information about buying a
used car than you can about the point you are making in terms
of what your economic prospects are when you get a degree from
a particular school. So, we are going to be following up with
you, because I think your point is spot-on. Thank you, Senator
Hatch.
Senator Hatch. Thank you.
Senator Thune, we will turn to you.
Senator Thune. Thank you, Mr. Chairman. I want to thank our
witnesses for sharing their insights today. We have had some
discussion from our witnesses about a range of tax provisions
and other programs that affect economic mobility, but I would
also suggest that the greatest driver of upward economic
mobility is not a government program, but the ability to find a
good-paying job. Unfortunately, right now the policies that we
have in place have failed to create enough jobs to lift incomes
and raise living standards.
The lack of a robust economic recovery has fallen
particularly hard on younger Americans. If you look at the
statistics, there is a recent Brookings Institute study that
found that the percentage of Americans aged 20 to 24 who were
employed fell nearly 8 percent between 2007 and 2010. This
compares to a decline of less than 1 percent for Americans over
the age of 55.
There is another study that estimated that a young person
graduating from college today will earn roughly 17.5 percent
less than they would if they had graduated during a stronger
labor market. That translates into about $70,000 in lost income
over a decade in time.
So we can discuss specific government incentives at the
margin, but I think we really need policies that promote job
creation and keep taxes low and that provide, really, the
economic certainty that I think our business owners and
investors need. It seems to me, at least, that now would be a
really bad time to implement large tax increases on the people
who create jobs and our entrepreneurs out there.
I want to just get your reaction to an issue that bears
pretty heavily in the part of the country where I am from, and
that has to do with the death tax, the estate tax. There is a
lot of discussion about that and how much revenue it raises
relative to the cost of compliance and other things.
But one of the things that we do know affects economic
mobility is the ability to save money over time. For many
families, their small business is their savings. For these
families, the Federal estate tax, or as I referred to it, the
death tax, makes it more difficult for savings and wealth to
pass from one generation to the next. It is especially true in
rural areas of the country.
According to the Department of Agriculture, farm real
estate accounted for 84 percent of U.S. farm assets in 2009.
For these farmers, who are land-rich and cash-poor and who have
seen land valuations rise dramatically in many parts of the
country, the death tax reverting to a top rate of 55 percent
next year, coupled with an exemption amount of only $1 million,
would be devastating.
If we want to help Americans save for the future, and if we
want to improve economic mobility, we need to make sure that
the Federal death tax does not result in the liquidation of
businesses that have been built up over a lifetime through many
years of hard work.
I guess I am just interested in your perspective on how
that issue bears on this ability to transfer
intergenerationally small businesses that would allow that next
generation to achieve a higher standard of living. And
particularly--I do not know if any of you can speak to this--
from a rural perspective, farm and ranch families that I know
of--in fact, I had someone mention to me just the other day,
with the land values that we are seeing in many parts of the
country today, you really can be land-rich and cash-poor and,
when that time comes, end up having to liquidate a lot of your
assets just to pay the IRS. That seems like a fairly
counterproductive thing to do if you are interested in
sustaining some of these businesses and creating economic
opportunity for future generations.
Does anybody want to comment on that?
Dr. Lefgren. I will comment for a moment. It is my
recollection that the estate tax, even when the tax rates are
higher, actually does not generate very much revenue because
there are so many mechanisms that families have to estate plan
prior to the passing. So in some ways, it is likely the case
that the incentive effects of the estate tax, in terms of tax
avoidance and that, are likely high relative to the financial
benefits of increasing the tax.
In countries like Sweden, they actually have high tax rates
on labor income and actually relatively low tax rates on
capital, because of the incentive effects. However, it is not
obviously clear to me why there is something special about
farmers relative to other people, for example, people who own
expensive homes that have been in the family for a generation.
It is not clear to me that that is sort of solving the problem
or that the inheritance tax is something that is an obstacle to
mobility. But I think the revenue effects, however, are pretty
small, so it is probably a 2nd-order issue in terms of----
Dr. Steuerle. Senator Thune, can I suggest that most of the
data that we examine here is for the broad swath of the
population, and I do not know if we could find the estate tax
to say that the top 1 percent of wealth holders--I do not know
how much that would actually show up even in our statistics.
I mean, a lot of what we are talking about on
intergenerational mobility particularly, is people near the
bottom being able to rise up to the middle and even, say, top
quartile, but not even necessarily the top 1 or 2 percent. I
would suggest you might want to think about, if there is going
to be a continuation of an estate tax at whatever rate, that it
be divided into a capital gains at death and an estate tax.
So instead of, say, a 30-percent cap death estate tax, you
might think of a 15-percent capital gains tax and a 15-percent
estate tax, which I think actually ameliorates a number of
problems, although it may not solve the problem for the farmer
who has had huge amounts of capital gains.
Senator Thune. Right. Good. All right. It is probably
somewhat unique to more the middle of the country. I mean, it
is not unique in the sense that you have a lot of small
businesses that deal with this, but I think in terms of farm
and ranch families who do work very, very hard, and in many
cases because of the value of their operations--which at one
time with land values were not what they are relative to today,
but we have seen these land values increase dramatically.
So now you have what would probably be characterized by
many as a relatively small farm that has a pretty high value,
and you would experience a significant amount of tax liability
when one family member dies and passes that on to the next
generation, which is what we try to encourage where I am from.
You want people to continue to stay in farming, ranching, and
agriculture. This has become a real detriment to that and a
real obstacle to that, but that may be, again, a factor that is
somewhat unique to where I am from.
Dr. Steuerle. And I think it is somewhat easy to exempt
most of the farmers in that situation. I mean, depending on how
we design it as well.
Senator Thune. You could, if you designed it the right way.
But as of January 1st of next year, the exemption level goes
down to a million dollars and the top rate goes up to 55
percent. If you have a 1,000-acre farm at $5,000 an acre on
that farm, you are at $5 million right there, and that does not
include equipment or anything else.
Dr. Steuerle. I think $1 million is very low. My
calculations on the lifetime value of Social Security and
Medicare benefits is they are close to $1 million for a couple,
too.
Senator Thune. Right.
Dr. Steuerle. So we are getting up pretty close to middle-
class assets, at least at some level.
Senator Thune. All right. Thank you.
Thank you, Mr. Chairman. My time has expired.
The Chairman. Thank you, Senator.
I might chime in with the remarks of the Senator from South
Dakota. In my part of the country, that is a real issue, for
the reasons that he indicated.
I wonder, what do we do about crime in cities, inner
cities? There have been reports in the last several days about
the murder rate going up in Chicago. The new mayor, Rahm
Emanuel, is trying to address it, and doing a very good job.
Chicago is a great city. But my sense is that, in a lot of
these cases, if you are born into a part of a city where all
you see is gang warfare, that is probably what you are going to
end up doing, being a gang member.
I do not know how you break that cycle. What do you do in
these neighborhoods? It is a crazy thing to say, but I have
been home in my State of Montana for 10 days, and I came back
yesterday, and all I heard was a bunch of sirens, cops chasing
after people, and they got hold of somebody, about eight squad
cars just a block from where I live. My gosh, we do not have
this in Montana. But it is here, and it is in other cities
around the country.
So, it is tough. How do you address mobility when you are
born in the inner city and all you see is crime, a single
parent, if you are lucky? How do you deal with that? Anybody?
Dr. Lefgren. Can I?
The Chairman. Yes.
Dr. Lefgren. This is something that I have done some
research on. There is good work by Lance Lochner and others
that looks at the impact of educational investments on
subsequent criminal activity. So in the long run, encouraging
the same investments that promote upward mobility actually
leads to reductions in criminal behavior. There is also
literature by Steven Raphael and David Mustard, who look at the
impact of labor market opportunities on criminal behavior.
So a lot of providing labor market opportunities to these
young people is also another medium- to long-run solution to--
these are what you are going to want to do dynamically. In the
short run, you have the options of increasing incentives and
incapacitation through incarceration, except I think that,
relative to other developed countries, we already have
excessive levels of incarceration for many offenses.
The Chairman. Obviously this is a hearing of the Finance
Committee on the tax code, but one thing that impressed me is
8, 9, 10 years ago I saw a local news program about how a
principal in a garden-variety school on the East Coast--it was
mixed races, nothing really to distinguish it from any other
school, except it had very high drop-out rates and very low
test scores. They were in a world of hurt at this school.
So the principal did something that took them 3 years to
accomplish. It looked like a very good idea. Essentially, he
figured out a way to have a parent or guardian of each student
spend a couple of hours a week at that school. Maybe somebody
was a playground monitor, maybe somebody knew a little bit
about English or math, maybe somebody knew a little bit about
shop or making something.
But anyway, after 3 years he was able to get a parent or
guardian of every single student to spend a couple of hours a
week at that school. Grades shot up, drop-out rates plummeted.
My sense is it is because the school and the parents took
ownership of the school and what was going on, knew other
kids--kind of a family, if you will.
My sense is, the more schools do things like this, maybe
earlier--I know it is easier at the mid-school age, but even at
an earlier age, perhaps, you can address some of this needed
sense of community at schools so kids have confidence, they
know they have friends, they know somebody cares about them,
and so forth.
Dr. Newman. Mr. Chairman, I think one of the things we can
actually justly be proud of in the United States over the last
couple of decades is that crime rates have actually gone down
very significantly in most of our cities.
The Chairman. I have seen that. Right. That is right.
Dr. Newman. That does not mean that that will necessarily
last forever. I think the wave of foreclosures that is leading
to abandoned properties in cities like the one where I live
now, Baltimore, or cities like Detroit, may well create a turn-
around on that that we will not be happy to see.
But I think that we need to recognize a very small number
of people can make a neighborhood dangerous for everyone else
who lives there. It is very rarely the case that you have
massive numbers of people involved in gang activity. You have a
few, and they make life pretty miserable for everyone else.
But we do know that strong neighborhoods that have good,
strong social backbones to them generally tend to police their
own and become neighborhoods in which crime rates do not
spread. So we need to look at what makes for stable
neighborhoods, and all the institutions we have been talking
about today--strong schools, strong families--contribute to
neighborhoods that have strong social organization, and that is
where you tend to see crime rates down, even if they are poor.
So I think it is important for us to recognize all of these
things are interconnected. All these institutions and their
stability are interconnected, and you do not see crime spread
where you have families that have opportunity for strength,
schools that are functioning, opportunities for young people
other than crime.
Dr. Steuerle. Senator?
The Chairman. Yes?
Dr. Steuerle. Can I mention one tax provision I think that
would affect the discussion here?
The Chairman. Yes, good. We have to get to tax here.
Dr. Steuerle. By the way, I reconfirm what you said. The
example you gave is one--if we could figure out ways--and it
would vary widely from a community in Montana to a community in
New York--to have an adult presence around most kids most of
the time, most of the year--there are a lot of different ways
to think about that--it makes a huge difference in what happens
in their life. This actually starts at a very early age.
But the tax code provision I would refer to is wage
subsidies. There is one group that is largely left out of our
social welfare system. Our social welfare budget is largely
oriented towards you and me as we get older. That is where all
the money is going, we know that, on the entitlement side. But
on the welfare side, it is for families with children, largely
single parents with children. We tend to exclude the married
families with children because their income starts rising just
enough that they get excluded.
The low-wage male, the young male and female who is just
starting out in life, typically is excluded from this system,
with the one exception: if they go to prison, they will get a
lot of government money, but not necessarily to help them.
I think there are ways to redesign our wage subsidies so we
try to subsidize a little more, or reorient it so we subsidize
a little more of the low-wage worker without requiring they be
the one who raises the children, or they be the one who, on the
side, helps raise the children as long as they do not marry.
The Chairman. Thank you. My time has really expired some
time ago.
Senator Hatch, anything?
Senator Hatch. Well, thank you. I just want to thank all of
our witnesses for being here. I am sorry I missed part of this,
because I was on the floor. But this is an extremely
interesting area.
I have some questions for you, Dr. Lefgren, but I think I
will withhold them and submit them in writing so you can answer
them for us, and for the rest of you as well. There are a
number of questions that I would have liked to have had
everybody on the panel give their answers to.
But I appreciate you holding this hearing, Mr. Chairman. I
think it is an important one, and I will do what I can to help.
The Chairman. Thank you. Thank you, Senator.
This really is critical. First, thank you. Second, I urge
you to keep thinking. When you are walking out of here and you
are going home, gee, here is something else that we could be
doing, something else I want that committee to know about and
push them on. So, please stay involved, because this is really
critical.
Thank you very much. The hearing is adjourned.
[Whereupon, at 4:07 p.m., the hearing was concluded.]
A P P E N D I X
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